This commentary originally was sent to Dividend Stock Advisor subscribers at 4:38 p.m. ET on Dec. 9.
We are looking back at some of the energy master limited partnership (MLP) names we suggested that readers avoid when we did a deep dive into the group last October.
Mid-Con Energy (MCEP) and Line Energy (LINE) -- two of the names we suggested readers should sell or avoid -- have reduced their dividends, but some still are trying to sustain their payouts, with current yields as high as 49%.
Targa Resources Partners (NGLS) stood out to us because of its 40% commodity exposure, which is well toward the high end for a midstream company. Targa has raised its dividend four times since we first highlighted it negatively, but only maintained its quarterly payout of 82.5 cents a share (17.8% yield) in October. In the meantime, the stock has lost 71% of its value and closed Wednesday at $18.49.
In November, the company agreed to be acquired by its C-Corp brethren, Targa Resources (TRGP), for what was then $6.3 billion of stock. Even though management expects the deal to be immediately accretive to earnings, TRGP shares also have fallen 70% year to date and closed Wednesday at $31.41.
As a result, the focus shifts towards Targa Resources' own quarterly distribution of 91 cents a share (11.6% yield), which management has increased every quarter since going public in early 2011. That said, we would not chase the double-digit yield at current levels, because both companies had junk ratings on their bonds before the combination. That situation likely will not improve as a result of the merger, and given the company's outsized commodity exposure, we believe that income-oriented investors should continue to avoid both NGLS and TRGP shares.
Surprisingly, Vanguard Natural Resources (VNR), which is an exploration-and-production limited liability corporation, has continued to maintain its monthly distribution of 11.75 cents a share (49.1% yield). Nonetheless, the underlying stock is down 88% over the past 14 months and closed Wednesday at $2.88.
While the company has hedged 65% of its expected production for 2016, we do not expect the dividend streak to last much longer. Vanguard's credit rating is five levels below investment grade, and bondholders generally win out in the long run. If investors need any more convincing, the stock was down 4% on Wednesday's session, while many MLPs bounced back as much as 10% on the day.